File-swapping software seemed in peril a year ago when the U.S. Supreme Court gave the entertainment industry a legal bullet: Its ruling reopened the door for lawsuits over programs used to share music, movies and other copyright files.
The Supreme Court, reversing lower court rulings, said developers of such programs could indeed be held liable for unauthorized sharing by their users — if the technology companies were somehow encouraging customers to steal music and movies.
Andrew Lack, then chief executive at Sony BMG Music Entertainment, predicted at the time: "We will no longer have to compete with thieves in the night whose businesses are built on larceny."
Yet a year later, peer-to-peer, or P2P, sharing continues to thrive, with firms behind favorite applications such as eDonkey, LimeWire, Morpheus and Kazaa, among others, still in business.
Although the threat of litigation did force the operators of BearShare, WinMX and i2Hub to shut down, the number of people using file-sharing services has gone up.
The average number of simultaneous file-sharing users was about 9.7 million worldwide in May, with about 6.7 million from the United States, according to BigChampagne LLC, which tracks file-sharing activity. In the same period last year, BigChampagne tracked 8.6 million average users globally and 6.2 million in the United States.
'Grokster ruling' introduced liability
The Recording Industry Association of America, a lobbying group that represents the major recording companies, credits the so-called Grokster ruling with helping to clarify the legal roadmap for copyright in the Internet Age and motivating some of the file-sharing operators to close down or go legit.
Without it, or the music companies' roughly 18,000 lawsuits filed against individual file-sharers since 2003, online piracy would be even worse, said Mitch Bainwol, chairman of the Washington-based group.
"We don't suggest that (unauthorized file-sharing) has been conquered, far from it," Bainwol said. "But it's not fundamentally decapitating the legal marketplace from growing in a pretty robust fashion."
Sales from music downloads, online subscription services and mobile phone ringtones have helped boost revenues and offset declines in CD sales for some labels.
By raising the potential for liability by online file-sharing companies, the Grokster ruling served to discourage private investment in them, suggested Jonathan Potter, executive director of the Digital Media Association, which counts Apple Computer Inc. and Microsoft Corp. among its members.
"It's fair to say there's more investment and more attraction and more potential in the (licensed) download services, the online subscription services, as a result of the Grokster decision," said Potter.
Licensed P2P not evolving as expected
One slice of the online music market that didn't grow as expected was that of licensed file-sharing services. The idea was some free-for-all networks would make deals with entertainment companies to sell music downloads and limit what users could share online.
Sam Yagan, chief executive of MetaMachine Inc., told the Senate Judiciary Committee last year that he would transform his firm's eDonkey software into a licensed music service rather than face the threat of litigation in the wake of Grokster.
But with 2006 nearly half gone, eDonkey remains an online free-for-all. A call to Yagan was not immediately returned.
Another licensed P2P service, Mashboxx, has yet to launch, despite suggesting it would do so as far back as early 2005. The firm didn't immediately return calls.
"The (licensed) P2P market did not evolve in the way a lot of people thought it would," said Ali Aydar, chief operating officer of San Francisco-based Snocap Inc. "A lot of the unauthorized P2P networks are still out there operating just as they were a year go."
Snocap — founded by Shawn Fanning, who had pioneered file-sharing with his creation of the original Napster — positioned itself two years ago as key to legitimate P2P services. To date, however, no one is using its technology for allowing recording labels to manage what songs could be shared on such services.
Only one service, iMesh, has made the transition. Its operators settled a copyright lawsuit in 2004 and relaunched as a licensed music service in November.
Talmon Marco, president of the New York-based iMesh, said it's been difficult competing with well-marketed music services such as the Apple's iTunes Music Store and with free, albeit illegal P2P swapping. Marco won't say how many people use iMesh.
Grokster Ltd. ultimately settled out of court and stopped distributing its software. Although users could still run copies they downloaded before, the programs are no longer supported or kept up to date, meaning users are likely to flock elsewhere.
Meanwhile, litigation continues against StreamCast Inc., which distributes Morpheus, and Sharman Networks Ltd., the firm behind Kazaa.
The case is back in federal court in Los Angeles. Ongoing attempts to settle have led to postponement of court proceedings, but a settlement has yet to be announced. The next hearing is scheduled for July 10.
Asked why the recording industry has not taken advantage of Grokster to sue additional file-sharing companies, Bainwol said the industry has concentrated on reaching out of court settlements with P2P firms to avoid further litigation — for now.
"We have been judicious and reasonable and patient," Bainwol said. "That does not mean that our patience will last forever."